The Fall of Barneys Burns a Hedge-Fund Star
Richard Perry controlled the department store during broader retail decline
Some billionaire hedge-fund managers buy sports teams. Richard Perry snapped up one of New York’s most influential luxury department-store chains.
Mr. Perry’s passion project—Barneys New York Inc.—filed for chapter 11 bankruptcy protection Tuesday with plans to close 15 of its 22 stores and with new financing that gives it time to find a buyer. Barneys’ troubles reflect the litany of woes hurting retailers across the U.S.: The company faced a sky-high rent increase and ran into difficulty navigating the rise of e-commerce.
The unraveling of Barneys is a blow for Mr. Perry, who developed a personal interest in the fortunes of the nearly century-old company known for taking chances on little-known designers. Mr. Perry’s hedge fund gained control in 2012 by swapping its debt for equity. All in, Perry Capital invested less than $300 million, a fraction of what it once managed.
Mr. Perry shuttered his fund in 2016, though it continues to hold several less liquid assets, including the Barneys stake.
“This was his passion. This was his New York Yankees,” a person close to Mr. Perry said of Barneys. “He loved that company.”
Mr. Perry’s spokesman, Richard Edelman, described Barneys as “a business investment for Richard,” not one driven by personal interest. “As Richard has done over the course of his career, he made the investment after significant diligence and determining it was a smart investment to make,” Mr. Edelman said.
As Barneys chairman, Mr. Perry closed unprofitable stores and reduced shipping and return costs, said another person close to him. But Mr. Perry was also resistant to input and made significant missteps that contributed to the company’s deterioration, according to several people currently or formerly involved with Barneys. They said he overemphasized the importance of physical stores, was slow to recognize the importance of e-commerce, and was unable to stave off a steep rent increase.
Mr. Edelman said Mr. Perry was deferential to the management team but, as board chairman, took responsibility for strategic missteps.
Barneys Chief Executive Daniella Vitale said Mr. Perry “has pushed me to take risks but also supported me when those risks did not result in reward.”
The 64-year-old Mr. Perry has long been one of the most prominent investors on Wall Street. He founded Perry Capital in 1988 with Paul Leff, a former portfolio manager at Harvard Management Co., after training at Goldman Sachs Group Inc. ’s famed risk-arbitrage desk. The multistrategy hedge fund hit a peak of $15 billion in assets under management in 2007. A big bet against the housing market paid off, as did an early position in the preferred shares of mortgage giants Fannie Mae and Freddie Mac .
His history with Barneys began in 2009, when Perry Capital snapped up $200 million of Barneys’ bank debt for about 60 cents on the dollar, said people familiar with the investment. Perry in 2012 converted the debt to equity to assume control of Barneys and put in another roughly $125 million.
Barneys represented a combination of Mr. Perry’s personal and professional interests. He has spoken affectionately of shopping at Barneys, where he bought his first suit in the 1970s. More recently, he has sported fashionable knit ties and cropped pants.
Soon after his hedge fund assumed control in May 2012, Mr. Perry called a meeting of Barneys’ senior management on a Sunday night at his penthouse apartment on the far east side of Manhattan. His wife, Lisa Perry, attended the meeting and spoke about Barneys, said people familiar with the matter. Mr. Edelman said Ms. Perry’s involvement made sense because she was a vendor to Barneys.
Barneys first began featuring Ms. Perry’s clothing, which was also carried at stores including Bergdorf Goodman and Bloomingdale’s, in 2009, when Perry Capital was a creditor, said people familiar with the matter. In 2016, Barneys licensed her brand as part of an effort to draw traffic and generate higher margins with exclusive designs.
Mr. Edelman said that Barneys didn’t pay anything to license Ms. Perry’s brand and that she is paid a design fee only when her line is profitable. Ms. Vitale said in a statement it was her idea to license Ms. Perry’s brand and that it has one of the highest gross margins among Barneys’ in-house brands.
Barneys expanded the Perrys’ already high-profile social circle, which included Jay-Z and Hillary Clinton. By representing Barneys, Mr. Perry became a familiar figure at fashion shows and friendly with Justin Bieber and other celebrities, according to people familiar with the matter. Ms. Perry regularly posts about Barneys on Instagram.
Barneys spokeswoman Tomm Miller said the Perrys attended store events to support staffers. Mr. Edelman said any socializing Mr. Perry did with celebrities was to benefit Barneys.
Mr. Perry’s interest in Barneys was profitable for years before it soured. Former Perry Capital employees said that Barneys was the rare investment Mr. Perry provided updates about and that he spent a significant amount of time on it.
In 2016, Mr. Perry hired Goldman to try to sell part or all of Barneys, according to people familiar with the matter. Though Amazon.com Inc., TPG Capital and Swiss luxury conglomerate Cie. Financière Richemont SA engaged, Mr. Perry didn’t view any offers as serious, one of the people said.
Mr. Perry closed his hedge fund in September 2016, citing “industry and market headwinds.” Its average annualized return was 10.7% from inception through August 2016, according to an investor document.
Perry has returned about 90% of clients’ money and is working on unwinding the remaining investments.